President Biden’s new $1.2trn package has the potential to usher in PPPs and asset recycling, and to boost investment in renewables

The US President Joe Biden’s plans for a $1.75trn (€1.55trn) Build Back Better bill hit a major stumbling block this week as Democrat senator Joe Manchin roundly rejected the package after a series of negotiations. Last month, the long-awaited $1.2trn bipartisan Infrastructure Investment and Jobs Act (IIJA) was finally passed. Combined, the two pieces of legislation could have been transformative in ushering in major investment in US infrastructure.

The Build Back Better was particularly important in the context of post-COP26 net-zero objectives, and there is still hope a revised version can be passed in the new year. But even on its own ILJA could be significant for institutional infrastructure investors that have long eyed the opportunity to open up a potentially massive market.

Although the IIJA was headlined as expenditure of $1.2trn, that number includes scheduled regular maintenance spending, so there is actually only $550bn of new investment. This is divided almost equally between traditional infrastructure – roads, bridges, rail, and transit – and what the administration terms “core infra” – investment in power, water and broadband. 

The need for an infrastructure bill was clear. Elliot Hentov, global head of macro policy and research at State Street, says: “The US has had such a dearth of public investment over the last 20 years that it has led to a serious deterioration in US infrastructure stock.”

The American Society of Civil Engineers 2021 report card, which gave ‘D’ grades to 11 categories of US infrastructure, observes that “Sectors like transit and wastewater have staggering maintenance deficits”. It notes 42% of bridges are at least 50 years old and 7.5% are structurally deficient, while leaks mean 6bn gallons of water are lost each day.

The infrastructure bill resulted from months of political discussions, delivering $800bn in cuts from what was originally intended. Nonetheless, as Karl Kuchel, head of infrastructure for the Americas at Macquarie Asset Management, says the bill “will begin to address historic underinvestment and help modernise America’s infrastructure systems”.

Among the key standouts, the bill allocates $108bn to upgrade the electric grid and energy, $55bn to clean drinking water, $50bn to water structure improvement, $17bn to ports and waterways, and $65bn to bolster broadband.

Transport is a key focus – $110bn is given to improving the nation’s roads and bridges, $66bn to Amtrak, and another $39bn to modernise public transit. Another $25bn will begin to upgrade US airport infrastructure which was welcomed by the Airport Council of America.

“The horse trading over what was contained in the bill was dominated by inflation concerns, but from a macroeconomic point of view the bill which has passed is only mildly stimulative,” says Hentov. He believes it will add no more than a quarter percent to GDP, “perhaps as much as 0.4% in some years”. He also thinks spending in some areas like childcare is likely to be anti-inflationary, as it “will free up productive capacity in the labour force”.

Having said that, the bill “is a proper pure-infrastructure play and it will therefore have a high fiscal multiplier effect”, Hentov says. “The localised effects could be very meaningful. There are some areas that have been chronically underfunded until now and the new expenditure will therefore have a dramatic effect. These include water infrastructure, broadband and climate-change resilience.”

The Build Back Better bill would have been equally significant, according to Hentov. It contained additional major expenditures in infrastructure, almost equal to the new spending in the infrastructure bill – most notably housing, which was set to receive something like $150bn in expenditure, and clean energy, which could have been anything up to a third of the package.

Together, these would have been a “significant opportunity for most private-sector businesses and obviously of great significance for infrastructure investors,” says, Hentov.

Kuchel says it is clear that “legislation alone will not be the funding solution for all US critical infrastructure needs [which requires] a robust expansion of private-capital investment”. He adds: “Public infrastructure owners should look to the private sector as potential partners who can help them make the most of these federal funds.” 

Ushering in PPPs and asset recycling

Tom Osborne

Tom Osborne is executive director at IFM Investors

Melbourne-headquartered global infrastructure fund manager IFM Investors has long been pushing for the US to embrace the ‘asset-recycling’ model used in its home market of Australia. The concept is to sell publicly-owned brownfield infrastructure assets to private investors and use the capital to help fund greenfield development. Australian state governments have raised billions of dollars through privatisation of airports, ports, toll roads and electricity grids.

Tom Osborne, executive director of IFM Investors, says: “The programme was put in place several years ago, and for every dollar of federal capital that was offered in the form of grant to a state or local government, over $6.50 of economic investment in infrastructure was created.”

Earlier this year, IFM Investors had hoped that “investment incentive grants” would be included in the infrastructure bill, effectively paving the way for asset recycling. They didn’t make it. But not all is lost.

Osborne, who is based in New York and is responsible for the origination, analysis, structure and execution of IFM Investors’ global infrastructure investments, believes the emergence of asset recycling in the US and a growth in the use of public-private partnerships (PPPs) are possible.

A critical factor is the requirement for US Secretary of Transportation Pete Buttigieg to two studies to Congress: to identify best practice for private-capital involvement in projects; and to address specifically PPPs and asset recycling.

Osborne hopes asset recycling will eventually come in as a result of this. “The problem in the US is not a lack of financing or funding. The problem is a lack of investable projects. And infrastructure PPPs are very directly focused on helping state and local governments to generate new revenue sources by tapping the latent value in existing infrastructure that they control.”

The types of assets that could be unlocked are largely government-controlled public infrastructure like airports, ports, roads, bridges, water systems and water utilities. “There’s great interest in the infrastructure investment community in all of those asset classes,” says Osborne.

The asset reclying report to Congress and a number of other measures will be helpful in opening up the PPP market, which is used more widely in other countries like the UK and Canada. “Most of the PPPs we’ve seen in the US have been in the transportation sector”, says Osborne, but their use could be broadening into areas like public buildings, broadband and real estate development around mass transit.

The IIJA also aims to streamline the permitting process in the US and expands the availability of low-cost federal financing through the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation and Improvement Financing (RRIF) programmes. It also boosts tax-exempt private-activity bonds (PABs). “TIFIA also now applies to airports and transit-oriented development projects, and PABs can now be used for broadband and carbon capture,” Osborne says. 

A boost for renewables?

Dan Winters, head of Americas at real assets sustainability benchmark GRESB, says: “This bill does a lot. Accelerating the clean-energy transition in the US requires infrastructure investments at scale.”

Pam Hegarty, senior portfolio manager and equity analyst at BNP Paribas Asset Management, says: “The signed infrastructure bill in the US did contain elements that help from a sustainability perspective.” She lists five: $73bn for the electric grid; $65bn for rural broadband, helping inclusion; $21bn for environmental projects, efforts to clean up mines and polluted areas; $7.5bn for electric charging infrastructure; and $47bn for climate resilience, addressing wildfires and coastal flooding risks.

“Resilience measures are project must-haves with all forward investments,” says Winters.

The bill establishes a national Center of Excellence for Resilience and Adaptation and advances resilience solutions for transportation networks. The Federal Emergency Management Agency’s (FEMA) Building Resilient Infrastructure and Communities (BRIC) grant programme includes a pre-disaster risk mitigation.

However, Carlos Sanchez, executive director at the Coalition for Climate Resilient Investment, says: “The extent to which this bill will achieve its full potential in the resilience space will depend on… defining how physical climate risks will be integrated in each stage of infrastructure upstream and downstream.”

Hegarty says the Build Back Better bill would have had “more meaningful impact”, including investment in clean energy and climate initiatives and incentives to grow domestic manufacturing and supply chains for solar and wind.

“The BBB bill has the potential to be very consequential for investors in infrastructure and renewables in particular because”, says Osborne, by extending and expanding “the availability of investment and production tax credits [to] new technologies like hydrogen, battery storage and carbon capture”.

He also notes that “direct pay” options “enable more investors to monetise the tax benefits associated with investing in renewables, as they will no longer have to have tax liabilities that they can offset”.

Whitney Jiranek, portfolio manager, US and global thematic equities at BNPP Asset Management, says the Build Back Better Bill was “definitely more heavily skewed towards green economy support [providing] a much-needed bridge for getting us from a very early phase of adoption in industries critical to achieving net zero by 2050 – wind, solar and EV – to a point where they can scale and begin to establish a degree of economic viability.

“This means everything from a prospective investor’s standpoint.”